November’s trends extended into year end

The US Federal Reserve was fully expected to lift the Fed Funds rate 25 basis points on December 15 and it did not disappoint. The Fed did surprise though with an adjustment to the forward guidance, adding an additional rate hike for 2017, taking the outlook to three rate increases. Prior to the meeting, yields were already on the way up in the fallout from Donald Trump’s US Presidential election victory. The Fed’ surprise gave them another nudge higher, impacting right across the globe. The addition of thin markets going into year-end exacerbated the move.

It was also a busy month for New Zealand. Prime Minister John Key surprised with his resignation, but given the new PM is former Minister of Finance, Bill English, there was little impact on financial markets. Further out, it does make this year’s election slightly more uncertain, although given the muddle of other uncertainties 2017 holds, the impact in longer-dated securities was limited.

The Government’s Half Year Economic and Fiscal Update outlined how November’s earthquake is to be paid for. This will largely be comprised of existing surpluses and diverted spending, with total bond issuance from the Government unchanged, although $1bn of issuance has been moved forward.

The release of New Zealand’s Q3 GDP data was delayed due to the earthquake’s impact on Stats NZ’s ability to process information, although it was only a week late. The data showed Q3 growth was some way ahead of expectations, although downward revision to prior quarters meant the annual growth rate, of 3.5%, was around expectations. Australia’s Q3 GDP surprised to the downside, limiting the move higher for Australian yields and keeping the Australian dollar under pressure.

Almost all currencies suffered to some extent against the USD over the month, as the trend which began with Donald Trump’s victory in November continued through the end of the year. This pushed the US Dollar index to all-time highs, with the Japanese Yen, in particular, struggling. The New Zealand Dollar was no exception and also declined - a move that may have been cheered by the RBNZ, with NZD strength one of the key drivers behind ongoing soft inflation in NZ.